The solvency position of Canadian pension plans dipped slightly in the first quarter of 2015.
The Mercer Pension Health Index stood at 94% on March 31, down from 95% at the start of the year.
The small decline in the funded status masks a quarter of significant volatility in the key variables that affect the funded status of pension plans. Long-term interest rates fell 50 basis points in the quarter, pushing pension liabilities higher.
Read: Lump of coal for pension plan sponsors
However, pension assets grew almost as much as pension liabilities due to strong equity returns, the positive impact of falling interest rates on bond portfolios and the magnifying effect of the declining Canadian dollar on the value of foreign asset holdings.
“Many pension plans remain more exposed to interest rate movements and equity market performance than they would like to be. However, plan sponsors have been reluctant to reduce their exposure to these factors at a time when interest rates are testing historical lows,” says Manuel Monteiro, partner in Mercer’s Financial Strategy Group.
“Nevertheless, there is increasing awareness of the importance of establishing a risk management strategy in advance, which would allow plan sponsors to act quickly when opportunities present themselves again.”
A new mortality table that recognizes increased longevity is expected to be adopted for purposes of determining lump sum values paid from a pension plan in August 2015. This change will decrease the solvency position of pension plans by about 2% on average.
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